Question

Six month T-bills have a nominal rate of while default-free Japanese bonds that mature in 6 months have a nominal rate of 1.10. In the rate parity holds, what is the 6-month forward exchange rate? Do not round intermediate clations. Round your answer to six decimal places edge rest

Answer 1

Six-month T- Bill Rate=3%

So, converting it for 6 months for calculations= 3%*6months/12months= 1.50%

Six Months default free Japanese bond= 1.10%

So, converting it for 6 months for calculations= 1.1%*6months/12months= 0.55%

Spot Exchange Rate=$0.009/¥

Calculating 6-month forward Exchange rate with Interest Rate Parity:-

The Formula for Interest Rate Parity Is

(1+i_d)=(F/S)∗(1+i_f)

where:

id=The interest rate in the domestic currency or the base currency

if=The interest rate in the foreign currency or the quoted currency

S=The current spot exchange rate

F=The forward foreign exchange rate

(1+.015)=(F/0.009)*(1+.0055)

(1.015)/(1.0055)=(F/.009)

1.009448=F/.009

F=0.009085

So, 6-month Forward Rate as per Interest Rate Parity is $.009085/¥